CXW: Benefit of Strong Balance Sheet in Rising Interest Rate Environment

By M. Marin

NYSE:CXW

READ THE FULL CXW RESEARCH REPORT

Recent trends illustrate stability of revenue streams

CoreCivic CXW reported 1Q22 revenue of $453.0 million compared to $454.7 million in 1Q21. Factors behind the slight revenue decline include the earlier than originally anticipated reduction of ICE populations at CXW's La Parma facility pending the facility's transition to state detainees under a new contract with the state of Arizona. CXW's recent sale of non-core revenue producing real estate assets also contributed to the lower revenue.

Nevertheless, the relatively flat revenue performance illustrates the stability of company's contracted revenue streams, in our view. In the aggregate, the divested properties and managed contracts represented about $15 million of quarterly revenue that CXW has been able to offset with new contracts and other initiatives.

As anticipated, the broader macroeconomic inflationary environment is impacting 2022 results, including boosting labor costs, particularly of registry nursing staff, as the company increases staffing levels. Although CXW is proactively managing G&A expenses where it can, 2022 results could be sensitive to exogenous factors including wage inflation and fluctuating COVID-19 cases impacting occupancy rates, as well as to how quickly the company can hire new personnel. We also believe the status of Title 42 represents possible revenue upside.

TTM at targeted level; other initiatives to enhance shareholder value likely

The company has pursued its stated goal of lowering relative debt levels and strengthening its balance sheet. The TTM leverage ratio (net debt to adjusted EBITDA) was 2.7x at the end of 1Q22, down from 3.7x at the end of 2020, and within CXW's targeted range of 2.25x to 2.75x. With cash of $378.2 million at the end of 1Q22, no major debt maturities before 2023 and no funds drawn against its revolver, we believe the company has significant liquidity. The company also expects to announce new credit facility in the near-term.

Management has indicated that likely upcoming initiatives could include seeking authorization for a new stock repurchase program. With no near-term need to access the capital markets and low levels of variable rate debt, the company believes it is better positioned than many others in a rising interest rate environment.

Expect potential revenue upside once Title 42 ends…

Separately, in our view, the potential termination of Title 42 later this month portends possible revenue upside for CXW. Government officials expect the flow of migrants to increase once Title 42 ends. Preliminary U.S. Customs and Border Protection data indicates that authorities detained 200k+ people along the southern border in March. This would represent the highest monthly total since August of 2021 even before Title 42's repeal. We expect ICE demand for capacity will increase once Title 42 is lifted. Thus, we see the potential for occupancy rates at several CXW facilities to increase, leading to incremental revenue.

Title 42 was enacted during the pandemic under the Trump administration to deter immigration into the U.S., with a stated public health justification to deter the spread of COVID-19. It was based on legislation authorizing the government "power to prohibit, in whole or in part, the introduction of persons and property" to curb a contagious disease from spreading.

Citing increased vaccination rates in the U.S. and migrants' countries of origin, the CDC endorses the termination of Title 42, although the measure has been extended previously during the pandemic in the face of rising case numbers. The Biden administration recently announced that Title 42 will cease by May 23, 2022, which has spurred concern that the administration might not be prepared for a potential increase in immigration along the southern border once Title 42 ends. In fact, several states have sued to block termination of the immigration measure.

… as demand for detention capacity rises

If, as government officials expect, the flow of migrants at the southern border increases significantly once Title 42 ends, there is concern that ICE does not have adequate detention capacity. Concurrent with the expected rise in flows of people seeking asylum in the U.S., ICE has also recently closed older detention centers that were deemed inadequate. This is consistent with recent directives from the Homeland Security Secretary for an overall reform of detention facilities. While phasing out privately managed detention capacity is a stated goal for the current administration, in our view it is unlikely that ICE can move towards this target in the near- to mid-term.

We expect ICE demand for capacity will increase once Title 42 is lifted. Thus, we expect occupancy rates at several CXW facilities to increase. Many (an estimated roughly two-thirds) CXW centers are operated under occupancy guarantees that exceed current actual occupancy levels. Once actual occupancy reaches – and then passes – guaranteed levels, we expect CXW to garner incremental revenue.

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